Nov 8, 2017 in Analysis

Labor Market Efficiency and the Market Structures

Introduction

The various market structures that exist in the world do play an important role in the level of efficiency in the labor markets. All organizations are in need of labor as a factor of production to help achieve its objectives and goals. In the economic world, the major economic problems which organizations seek to solve are:

  • What to produce
  • How to produce
  • When to produce

Labor, being an important factor of production, has to be evaluated in relation to the economic problems above. The questions to be answered are: whom to hire, when to hire, and how to hire (the criteria to use in the selection process). An ideal solution usually depends on the type of market structure in which an organization is operating.

The research paper seeks to answer the question why there are wage variations given the same occupation and region of work. It focuses mainly on the perfect market model with analysis of its characteristics in relation to the labor efficiency. A perfect market model is very hard to find in the real world. The question of why an individual may be receiving a higher wage than another person with whom they have the same job qualifications is, therefore, answered in the following research. It provides insights of what should be considered in the process of job search

to help eliminate the dispersions that exist in the compensation packages in various occupations.

Perfect competition is a term which has been used by economists to describe an ideal world. This is the world where competition rules. Players try to ensure that their production costs are as low as possible and the available resources are put into maximum use to ensure satisfaction of the consumer demands. According to Carlton and Perloff, for a perfect market to exist, there has to be many firms in the market, the product in which they are dealing in has to be homogeneous, freedom of entry and exit, and also the fact that an individual firm is not in a position to influence the price of the commodity.

The theory of competition in the labor market assumes equal advantages obtained by the employees for the labor inputs which are homogeneous. Market researches conducted, however, have revealed a wide range of variations in earnings in a specific market model for a specific occupation. The theory basically states that for equilibrium wage to be achieved, workers will have moved from low-paying jobs to high-paying jobs (Carlton, Perloff).

Considering the labor market in the information technology industry, Google has been mentioned among the top companies worldwide to work for.  This is because it provides the best working conditions, salaries, social amenities, and growth prospects. They constantly face the challenge of receiving too many job applications from people both qualified and unqualified. They have to answer the crucial questions of: who to hire, when to hire, and how to hire; the best procedure to get the best qualified person for a given job. They have implemented a strategy of recruiting interns, who are trained and then later offered a job, in case a vacancy arises within the organization.

Empirical studies have been conducted among the working class to test their knowledge on the preferred working conditions and the range for the wages and salaries within their local markets. From the data collected, it was evident that most employed workers are not aware of other available job opportunities in their surrounding, neither were they aware of their specific characteristics. Their attitudes towards their current jobs were dependent on the level of satisfaction, rather than the awareness of the market wage patterns. Unemployed individuals in most instances discovered what was available in the process of a job search. They usually take the first job they applied for, and in rare cases they do weigh the alternatives before settling for a job.

From the studies above, it is evident that workers are not perfectly informed. The major task now is to establish the differences, if there are any, to the supply of labor models that are brought about by lack of knowledge. When the unemployed makes a choice of taking up a job or leaving it in the hope of something better, it is always based on uncertainty. In either situations there can be either over or underestimation of the value of the job given the lack of perfect knowledge. However, in the end, the equalization of the net advantages is achievable if these are distributed randomly among workers, and the differences arising will cancel each other out (Addison, Siebert).

In the presence of homogeneous commodities, it is hard not to expect dispersion in commodity prices and service fees. In the real labor market, jobs and workers are not homogeneous; the working conditions are not also the same. This has been a major contributory factor in the wage disparity among individuals working for Google and other IT companies like SAP and Microsoft, not forgetting other small upcoming firms.

When an individual happens to have many job offers, it is obvious that he will not accept the first offer; rather, he will try to analyze the job conditions of other firms. He will look for the firms which offer higher salaries or a lower pay with reference to the working conditions and other benefits available. There is no point in time when there will be no frequency distribution of employers’ wage rate offers. If the individual find that there is a large dispersion in relation to search costs, contacting several employers will offer the best solution. On the other hand, if there is a normal distribution, then the search costs can be eliminated. However, there can be a possibility of a marginal gain in wage if an additional search is conducted. Suppose Wm is the expected maximum wage, and N is the number of searches, then the gain that an individual can obtain from an additional search can be given by:

%u2206Wm = ∂Wm%u2215∂N

The general assumption is that as the search increases, the gains are also expected to increase. A longer search is often conducted by individuals who intend to stay longer in their jobs. It, therefore, emerges that the longer the search, the smaller the dispersion of maximum wage rates, ceteris paribus. Research has shown that most of the individuals working with Google intended to stay for longer periods with the company, and it can be generalize that they conducted extensive searches before they decided to settle for the company. From the above analysis, it can be concluded that individuals who intend to stay in labor force for a shorter period have larger dispersions in earnings, ceteris paribus.

Considering the cost of search, a worker will do his search in relation to the total job offers he has because the major cost here is time. Searching is considered to be most efficient when the worker is unemployed. The search cost in this case is an investment, which is obtained by calculating the present value of the compensation differences between the job which is finally accepted and the initial job offer. Where search costs are high, individuals will conduct fewer searches. This implies that there will be low search costs in instances where prospective employers are easily identified. Wage dispersion is also expected to be smaller during the periods when employment is expanding. If there is a high unemployment level in a given occupation, there is a high possibility of already discovered opportunities being taken by other individuals in case of a slow response. This may bring about a reduction in the number of searches conducted, and hence the economic activity levels on wage variance cannot be disentangled with ease.

Summing up the discussion above, there is a connection between lack of knowledge/ignorance and wage dispersion. Labor market efficiency can be consistent with the presence of either of the above. Therefore, wage dispersion in inputs which are homogeneous in nature can be attributed to the fact that information is not perfect, and that there is a cost attached to it. Not all available offers will be identified leading to age disparity. The main function of information is to ensure that low productive workers do not get high paying jobs as their more productive counterparts, and this helps in workers targeting more efficient employers.

Job Search Methods

The methods which an individual employ to look for jobs also attribute to the labor efficiency. The major categories are the formal and informal methods. Research has shown that most of the people acquired their current jobs through informal searches. The informal method, however, has its disadvantages: it has a longer frictional unemployment period; and the assurance that deployment has been conducted in the best efficient way is very low. The choice of a particular method will depend on its efficiency and the labor market tightness (Stigler).

A research conducted by Reid, indicates that those who found their jobs through the formal channels tended to be more dissatisfied almost immediately with their jobs. This is because these jobs do not live to their expectations, which they had based on imperfect and inadequate information. This analysis showed that policy makes ought to go with the individualistic approach to job search. The job search method, therefore, has a contributory factor to the labor market efficiency and wage disparity.

Labor Mobility

Labor mobility also plays an important role in the competitive market model of labor. Individuals are more likely to move to highly attractive jobs to eliminate the differences in a given occupation. Most of the people make their decisions based on the interpersonal relationships; the wage structure does not play a major role. Individuals have different factors that motivate them. Therefore, it is important to examine the effects of variation in a variable such as price, assuming all the other factors remain constant. The longer employees stay with the company, the easier it is for the organization to determine what motivates them; thus, providing the right incentives to retain them. They will be able to know what they do best. This will help the organization reduce turnover rates, which usually come about as a result of employees seeking better terms of employment to reduce the wage dispersions within a given occupation.

Upon examination of geographical mobility, individuals working in the Google head office are more likely to be paid higher salaries compared to their counterparts in other regions, especially those based outside their continent. Moving to the job locations can be costly, and an individual may decide to settle for a lesser paying jobs hence the wage disparity. This fact is not in line with the assumption of free movement of resources associated with a competitive model. There has been an increased tendency in occupational mobility. People more often than not do move from one occupation to another. This is because some occupations tend to pay higher salaries given the amount of work. In competitive model, all players try to ensure that they retain the best in terms of labor force. They do this through higher wages, bonuses, and good working conditions. This competition has a way of stretching up the wage structures of various organizations. Those who are unable to keep up with the high competitive nature do experience high quit rates among the employees.

It is impossible for labor to be homogeneous. Personalities vary from one individual to the next. Thus, the assumption of a perfect market model is hard to apply in the context of the labor market. This has contributed to the large wage dispersions in the labor market. Some employers opt for piece-rate method whereby individuals are paid based on the amount of work done, rather than the weekly or monthly wages. Analysis of these workers has shown that those who are paid per piece tend to be faster than those who have constant wages. However, efficiency level can be low, as they compete on the number of jobs done, rather than the quality of their outputs. Employers have, therefore, introduced a system whereby these employees are paid bonuses based on the quality of their work besides their piece-rate payments.

From monopolistic market structure view point, there are low possibilities of job searches which can be conducted by an individual. This is because there are few players in the market. In most instances, their wages structures are not that good. They often take advantage of the fact that they are the only players in the market, and chances of high quit rates are very low. In the industries where the player is a monopoly, there are barriers to entry like the high cost of establishment, and the time it takes for a given firm to gain a considerable market share. This is the advantage upon which the monopolistic firm operates on.

Conclusion

Competitive labor market theory is known to be characterized by well informed buyers and sellers, easy entry and exit, easy resource mobilization, and homogeneous products. However, this theory does not hold in the real labor market as these assumptions are not realistic.

The information that an individual acquires, come with costs, which is usually the worker’s time. This implies that the time taken in conducting information search will be limited, and that not all offers will be looked into hence resulting into wage dispersion. Modification of the perfect competition model through putting aside the well informed buyers and sellers’ assumption has helped to study further the competitive model’s predictive reach. Of importance also is the consideration of job changing process to help establish whether the outcomes are consistent with the competitive model market predictions. The process involves movement from a given occupation, geographical region, or even industry to another.

 It is not safe to conclude that a perfect model exists. Labor has many variations in terms of the level of experience needed for a given job. It can also be examined in relation to other market structures that exist like the monopoly and oligopoly. However, with the help of the government, the level of perfection can be improved to help achieve an equally distributed economy in terms of household earnings.

The assumption of perfect information regarding digging on various prospective employers’ wage structures differs based on the cost the individual will incur, and how well the employee knows the employer. The higher the cost, the fewer the searches, and hence higher wage dispersions. Education level and experience on the job also affect the degree of dispersion. For one to eliminate this gap or reduce it to a lower level, sacrifices on search costs, advancement on education levels and acquiring the much needed experience is of importance.

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